COVID-19: Global real estate implications
Uncertainty looms large across the globe, in the wake of the COVID-19 outbreak. At the time of writing, many global cities continue to witness a surge in confirmed infected cases and mortality rates. Public health remains a focal point, but organizations and governments are also contemplating short and long-term economic ramifications. As things stand, the near-term impact of the pandemic on financial markets is undeniable, with stock market crashes, trade disruptions and upward pressure on the U.S. dollar. National economies around the world are taking prudent measures for the long haul, through stimulus packages, liquidity programs, low lending rates, subsidies and other interventions.
However, unlike the inherently volatile financial markets, property markets move rather slowly, this will result in the impact of COVID-19 on them being more gradual, in its manifestation. This is to say, it is quite early to make strong inferences and predictions. Also, the impact can vary within real estate verticals and different countries, much like the non-uniform impact of COVID-19 itself. Retail and hospitality segments are bracing for challenging times ahead, with the former facing headwinds through supply chain disruptions, particularly from China, and the latter through reduced tourism. However, the industrial CRE and residential segment are expected to be resilient in the face of the pandemic, for the foreseeable future at least, according to Cushman & Wakefield(1).
China – where COVID-19 was first identified – has reported massive disruptions in the manufacturing and services industry. According to a survey conducted by Colliers, the retail sector has taken the worst hit, with 88% respondents experiencing reduced revenues(2). Among the landlords surveyed, a sizable 59% of respondents expect rents to remain flat in the months ahead. But 40% of respondents expect vacancy rates to increase. In Hong Kong, however, the pandemic has compounded the existing economic stagnation caused by large-scale protests. Vacancy is likely to rise, rents may fall and office leasing activity could lag in the months to come. In defense of the Cantonese metropolis, Hong Kong was one of the first property markets to make a swift recovery following the 2003 SARS outbreak. However, there is no certainty that history will necessarily repeat itself, this time around.
European countries’ bid to contain the outbreak is impacting the credit quality of real estate investments, as tenants continue to default on payments. Traditional reliance on capital markets could also affect real estate companies, according to SP Global(3). Vonovia SE and Deutsche Wohnen SE, the two largest real estate firms in Germany, have extended financial support to tenants. Similar measures can be expected across Europe in the next few months, after the ongoing public health crisis de-escalates. But the incurred economic losses could threaten liquidity and deteriorate real estate financing conditions across Europe, in the long-term.
The US economy, on the other hand, has nosedived to virtually unprecedented lows. Mortgage rates were at an all-time low in early March and they could plummet further in the coming weeks. The already slow property market is expected to be impacted by lack of international buyers, particularly the Chinese, and prices could soon fall, according to experts at the National Association of Realtors(4). In the meantime, local investors could capitalize upon low prices. Elsewhere in India and Australia, central banks have slashed repo rates and taken liquidity easing measures to mitigate COVID-19 impact on real estate. If the United Nations’ estimates are anything to go by, India is set to face an immediate trade loss to the tune of $330 million(5) and the outlook is far from promising for both real estate and the economy at large, especially in view of India’s troubled financial system, which could impede refinancing.
COVID-19 and Middle East real estate
The oil-centric economies in the Middle East could face setbacks, especially if their trade partners are highly impacted by COVID-19. Oman, for example, has more than 53% of oil exports going to countries facing a COVID-induced lockdown. Additionally, loss of tourism can be factored into short-term impact on countries like Saudi Arabia and the UAE. At the same time, governing bodies have announced stimulus packages, which could help sustain the momentum in the real estate sector. Saudi Arabia and the UAE lead the way, with $32 billion and $27 billion packages, respectively.
The UAE, for its part, has witnessed a systemic response to COVID-19 that cuts across public and private sectors. Abu Dhabi has announced a waiver on real estate registration fees, while private real estate companies are offering flexible rental payment plans. Dubai had recorded an increase in property sales volume in the past few months, accompanied by decade-high affordability. Although the pandemic has halted the momentum, the disruption is likely to be short-term instead of a prolonged stagnation, according to Savills(6). This sentiment is echoed by the Director Lynnette Abad of the Property Finder Group, according to whom, real estate will continue to offer attractive returns compared to other asset classes.
At this juncture of the outbreak, with no end in sight, optimism is naturally elusive in global real estate. The industry-wide disruption has brought multiple operational gaps to the fore, like the lack of diversified supply chains and contingency planning. The increase in work from home could incentivize business leaders to reduce office footprints, in case the same or similar operational efficiency can be achieved remotely. This in turn could increase vacancy rates and reduce CRE demand. Similarly, online retail could gain traction at the expense of brick-and-mortar retail, as customers could refrain from external interactions as much. Needless to say, nothing is certain at the moment, and keeping a close watch on the evolving scenario will be essential to navigating the crisis at hand.